Select Energy Services, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The supplied filing is for Select Energy Services, Inc.; this differs from the “Select Water Solutions, Inc.” name in the request metadata.
Business context and period
The company provides water-management, oilfield chemical and wellsite services to the oil and gas industry in the United States and Western Canada. Its results include Rockwater, acquired November 1, 2017, so comparisons with first-quarter 2017 are substantially affected by the merger and are not like-for-like.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $376.4 million | $99.9 million |
| Gross profit (loss) | $47.9 million; 12.7% margin | $(0.2) million; negative margin |
| Operating income (loss) | $18.6 million | $(12.5) million |
| Net income (loss), consolidated | $16.1 million | $(12.3) million |
| Net income (loss) attributable to Select Energy Services, Inc. | $10.1 million; $0.15 per share | $(4.2) million; $(0.21) per share |
| Adjusted EBITDA | $59.6 million | $13.8 million |
| Cash from operations | $35.2 million | $(7.9) million |
| Capital expenditures | $32.6 million | $10.8 million |
Revenue increased 276.7%, primarily reflecting the Rockwater merger, greater completion activity and contributions from the GRR acquisition. Management reported segment revenue of $257.5 million for Water Solutions, $63.6 million for Oilfield Chemicals and $55.7 million for Wellsite Services, before $0.5 million of eliminations. Adjusted EBITDA is a non-GAAP measure.
Liquidity, debt and balance sheet
- Cash was $6.1 million at March 31, 2018, compared with $2.8 million at year-end 2017. Current assets were $485.2 million and current liabilities $202.8 million.
- Long-term debt was $75.0 million, outstanding under a $300 million senior secured revolving credit facility. The borrowing base was $255.6 million; letters of credit were $19.8 million and reported unused borrowing capacity was $160.8 million.
- At May 7, 2018, the company reported $85.0 million drawn, $18.3 million in letters of credit and $178.3 million available borrowing capacity.
- The company was in compliance with debt covenants at March 31, 2018. Total assets were $1.391 billion and total equity was $1.081 billion.
Material changes, outlook and risks
- Management attributed improved profitability and operating cash flow to stronger demand, increased completion activity and the Rockwater merger. The company reported a 28.7% increase in average quarterly rig count year over year.
- Effective January 1, 2018, revised estimated useful lives for certain equipment reduced depreciation and amortization expense by $4.7 million and increased net income by $4.7 million, or $0.04 per share.
- Unusual items included a $2.0 million impairment of an investment, $2.7 million of non-recurring transaction costs (as presented in the Adjusted EBITDA reconciliation), $1.1 million of lease abandonment costs and $0.3 million of inventory write-downs. Rockwater merger purchase-price allocations remained preliminary.
- Accrued obligations for exited facilities totaled $21.6 million, including $3.3 million current, with lease payments extending through 2027. The company said it had completed exits from underperforming facilities.
- Management expected operating cash flow and available credit to fund operations for at least the next 12 months and intended to pursue selected, accretive acquisitions. No numerical earnings or revenue guidance was provided.
- Demand, pricing and results remain exposed to oil and gas activity and commodity-price volatility, competition, labor and equipment availability, weather, regulation, and integration of Rockwater. Variable-rate debt and Canadian-dollar exposure also present risks.
- Rockwater subsidiaries were under investigation concerning emissions-control alterations on fleet vehicles. The company reported cooperation with authorities and no charges at the time of the filing; it could not estimate potential fines or penalties. Similar cases have involved fines of up to $7,200 per altered vehicle.
Important facts for investors to verify
- How much of revenue and earnings growth reflects the merger and acquisitions versus organic activity, pricing and margins.
- Whether working-capital demands, particularly the $407.0 million of trade receivables, convert to cash as expected while capital spending remains elevated.
- Ongoing borrowing-base availability, facility covenant headroom and the effect of variable interest rates.
- The final Rockwater purchase-price allocation and integration costs, and whether the useful-life estimate change continues to affect reported depreciation.
- Developments, potential costs and any charges related to the emissions investigation, as well as the duration and cash burden of abandoned-facility leases.